Faith in South Africa's economy is faltering amid political instability and corruption scandals.

South African pension funds have cut their holdings in local government bonds to the lowest level in nearly four-and-a-half-years because of political turbulence in the country, but yield-hungry foreign investors are proving less hesitant.

Domestic pension funds have historically been the largest investors in South African government bonds, but National Treasury numbers show their share has fallen to 27.2 percent as of end April -- the lowest since December 2012.

Conversely, foreign investors have been buying, according to data from the Johannesburg Stock Exchange, and now hold 39.4 percent of the bonds -- their highest level on record. The rest are held by banks and other financial companies.

Local funds have steadily decreased their holdings in government debt since January 2016, after President Jacob Zuma changed finance ministers twice in one week at the end of 2015.

Sharp sell

The moves led to a sharp sell-off in the rand currency and bonds.

But the political risks were heightened even more in March this year when Zuma dismissed respected finance minister Pravin Gordhan, leading to credit ratings downgrades to "junk" status by S&P; Global Ratings and Fitch.

Moody's, whose Baa2 rating is two notches above "junk", put South Africa on review for a downgrade.

"Locals are definitely more worried about the bonds and the rand because of the (latest) cabinet reshuffle. They're more cautious about having big bond holdings," Ashburton Investments portfolio manager Wayne Mccurrie said.

Investors fear policy steps to spur on the economy and keep debt in check are taking a backseat to corruption scandals and the jostling for positions as Zuma's ruling African National Congress (ANC) prepares to elect new leaders in December.

Improper dealings

Indeed, leaked documents released by South African media on Thursday alleging improper dealings in government contracts were seen healing more pressure on Zuma.

Isabelle Mateos, BlackRock's chief multi-asset strategist, said South African bonds offers opportunities and continue to draw the bulk of flows to emerging markets.

But she said this would quickly change if politics did not improve. "South Africa is not one of our favourites, and that has to do with political and policy uncertainty. We are not actively shorting South Africa but the upside is very limited," she said.